Cathay Pacific: The declining role of freighters in air cargo

24 / 02 / 2014

James Woodrow, director of cargo, Cathay Pacific

If Cathay Pacifichad stuck to the plans it had at the end of 2011, it would have had a fleet of 35 freighters by the end of 2016: 10 B747-8Fs, eight B777Fs, six B747-400ERFs, six B747-400Fs and five B747-400BCFs.

That was always the most optimistic scenario, and probably Cathay would actually have ended up with 30, once a few older units had been retired. Instead, it has now unveiled plans to shrink from 25 at the end of this year to 20 by 2016. No greater illustration is needed of the declining role of freighters in air cargo.

What makes the example of Cathay so interesting is that, with the possible exception of Gulf carriers like Emirates, surely no operator is better placed to profit from whatever air cargo growth might be available.

Its base is the world’s largest air cargo hub – and on its doorstep is the world’s most important and dynamic air cargo market. So if Hong Kong-based Cathay is scaling back its freighter plans, the rest of the world needs to take note.

Indeed, cargo director James Woodrow even reckons some of the big names are questioning if they need freighters at all. “My view is that other operators will follow Japan Airlines and get rid of their freighter fleets,” he says. “Others will be doing as we have, and right-sizing their fleet through [strategic] parking and disposals.”

He admits that among those he has in mind are Singapore Airlines, EVA Air, China Airlines and Qantas. Recent years, he says, have been “death by a thousand cuts: everyone held on hoping the industry would turn around”. But now he thinks the trend is clear.

“Air cargo is moving into an era of fewer freighter operators. Those that remain will have to invest in modern, fuel-efficient aircraft, and that is a difficult decision. Most carriers could provide a better business case for a new passenger ‘plane than a new freighter.”

The reason why freighter operations are getting squeezed are, of course, well known to everyone in the industry: growing belly capacity as passenger fleets expand, and slower economic growth than in the 1990s and early 2000s.

There is also the factor that everyone but Woodrow avoids mentioning – the seemingly unstoppable rise of the Gulf carriers. “They have grown very rapidly and that has to be at someone else’s expense,” he says. “They’ve definitely taken [market] share from us.

“The lowest cost of providing capacity is a B777 belly, and they can fly freighters only half way to Europe and then can switch to bellies and distribute to their huge networks. That has made Europe much more difficult for us.”

Meanwhile Cathay has been replacing B747-400 passenger aircraft to Europe with more cargo-friendly B777s and increasing frequencies. London is a good example of this. A few years ago it would have had three B747s a day, with 35 tonnes of capacity between them, whereas now it is five B777s – with up to 20 tonnes each.

“So, in a three-year period, belly capacity has trebled, and consequently the number of freighters we fly to London and Manchester has decreased. We now have only 11 freighter flights a week to Europe when, in 2008, it was 32.”

By contrast, the transpacific is still beyond the reach of Emirates, and while belly capacity is growing to the US west coast, payload restrictions reduce its impact further east.

That makes traditional Cathay cargo markets such as JFK, Chicago, Atlanta, Dallas and Miami remain as prime destinations for freighter operations. Cathay serves each of these, along with Los Angeles, six times a week, and added Guadalajara late last year, with Mexico City to follow this month (March).

All of these routes are now operated by B747-8 freighters and, far from regretting that it ordered so many of these aircraft, Cathay has increased its original order from 10 to 14, the 14th added only recently.

These will in future be the core of the freighter fleet, with the six B747-400ERFs (the last B747Fs Boeing ever built) retained for Asian and European routes, along with one leased BCF.

All the other freighters – including six factory-built B747-400Fs and the remains of Cathay’s BCFs – will leave the fleet in the next two years. One BCF and four -400F models have already been parked.

Whatever the capital costs of the aircraft that remain, that will leave Cathay with the most modern, most fuel-efficient freighter fleet possible, though that fuel efficiency works only if Cathay is able to fill the aircraft day in, day out.

Woodrow’s initial answer here is that this is not a problem for a carrier based at the world’s largest cargo hub, but he does admit that the game has changed somewhat in recent years.

Once, the Pearl River Delta was the factory of the world, but first the Yangtze River Delta and then the inland regions of China have started to take over, with cheaper production such as garments moving to Bangladesh, Sri Lanka, Vietnam and Indonesia.

That, says Woodrow, means Cathay has had to become more of a network carrier on the cargo side. It now has six freighters a week to Zhengzhou, five to Chongqing, four to Chengdu, six to Hanoi, three to Dhaka and Jakarta and two to Colombo.

Meanwhile its intra-Asian belly cargo network is expanding rapidly, as the region’s businessmen and tourists take to the skies. Woodrow points out that, unlike other carriers in the region, Cathay’s fleet is entirely widebody (with the exception of some A320-family aircraft operated by subsidiary Dragonair) – which gives it vast capacity on some routes.

“To Singapore, for example, we operate 10 times a day with 15 tonnes a flight on A330s, or a lot more on some B777s. That gives us 150-200 tonnes a day, just to Singapore. Or we fly seven times a day to Tokyo with 100-120 tonnes of capacity, or Bangkok 8-9 times a day.”

There is also a great list of places that Dragonair serves with multiple daily frequencies to destinations in mainland China, and a large number of services into India.

All of this, Woodrow says, gives Cathay a “fantastic feed and distribution network” for the long-haul flights, and ensures its B747-8Fs can be kept full. He wonders how all-cargo carriers such as NCA or Air-Bridge can manage without it.

He also thinks that, even as manufacturing becomes more distributed across Asia, Hong Kong is a great place to hub.

“If you look at all these production sites, then we are in the centre of that map, whereas Singapore is more on the southern tip. Plus we have an increasingly good consumption story as China increases its consumer imports. That story has decades to run.”

Cathay has also recently completed opening its new cargo centre at Hong Kong Airport, which gives it more control over its handling and an ability to be more flexible in tailoring premium products to customers.

So Woodrow can now claim: “The world’s best cargo hub, a new cargo terminal, a new fuel-efficient passenger air-craft fleet making a great belly network, and a fuel-efficient freighter fleet.”

That all sounds rather rosy, except that in the short term he admits that there is still too much capacity in the market. “Demand is improving but belly capacity is continuing to rise, so we need more freighter parking,” he says. The message to the industry is: ‘We have done our share: now it is your turn’.